Exchange traded funds try to reflect the performance of an underlying market. However, there are times when an ETF may diverge from the net asset value, especially with international markets.
For example, the Global X FTSE Greece 20 ETF (NYSEArca: GREK) is currently trading at a 10.4% discount to its NAV, according to Morningstar data.
GREK plunged 8.9% Monday on over four times its average daily volume after Greece rejected austerity measures demanded by international creditors in a referendum vote over the weekend. The Greece ETF has been swinging in volatile trading over the past week. [Greek Drama Extends as Greece ETF Flirts With new Lows]
ETFs, more or less, consistently reflect the movement of their net asset value, or combined value of all securities in an ETF’s portfolio divided by the number of ETF shares outstanding, as market makers or authorized participants create or redeem ETF shares by buying or selling baskets of underlying securities for ETFs.
Since ETFs trade like any other stock on an exchange, the ETF’s price can fluctuate throughout the day. ETFs typically update their underlying trading value, calculating the approximate NAV every 15 seconds throughout the trading day.
In domestic equity ETFs, the NAV works as intended. The NAV provides a fair value of the ETF, which basically means the fund is trading in line with its underlying assets with little or no tracking error. This also allows investors to get a better view of whether or not they are over or underpaying an ETF.
When the ETF’s price is lower than the NAV, the ETF is said to be at a “discount” – the ETF is valued less than the fund’s overall holdings. If the ETF’s price is above the NAV, the ETF is said to trade at a “premium” – the ETF is trading higher than what the underlying holdings are worth. [Premiums & Discounts]